Oil Majors Win Ruling in Pricing Dispute With U.S.

By J. P. SmithJanuary 22, 1978

A U.S. District Court has barred the Department of Energy from forcing major oil companies to return up to $1.3 billion in alleged overcharges to consumers.

The ruling, made Friday in Cleveland, and the judgment expected soon in a similar regulatory court battle pending in Delaware, are milestones in what Energy Department's Scott Lang describes as "easily the most important piece of enforcement litigation we have now against the oil companies."

Lang, the head of the department's regulatory litigation efforts, said the DOE has yet to decide whether to appeal Judge John M. Manos' decision in Cleveland, although he would not rule out an appeal.

Both court cases deal with the contested interpretation of Federal Energy Administration oil pricing regulations in effect during 1975 and 1976. FEA was folded into the Department of Energy when President Carter's energy reorganization legislation was enacted into law last year.

The central issue in both cases is the treatment of so-called "nonproduct costs" that refiners would be allowed to pass through to consumers while oil price controls were in effect. Nonproduct costs include operating and marketing expenses, such as labor costs. FEA, and now the Energy Department, maintained in court that the major oil companies should not be allowed to pass through these nonproduct costs.

Manos held in favor of nine major oil companies, including Standard Oil Co. of Ohio, Exxon, Mobil, Gulf, and Texaco, which sued FEA a year ago to protest an FEA ruling to return some of the non-product costs that had been added to consumer's oil product prices.

The oil companies argued in District Court that while the regulations were in effect FEA auditors gave the major oil companies ambiguous and erroneous interpretations of the pricing regulations, which FEA latter rescinded.

Manos said that the FEA regulations were "remarkably inept and self-contradictory" and ruled against the government and in favor of the oil companies.

On discovering the contradictory interpretations over the pricing regulations, FEA attempted in 1976 to force the oil companies involved on a case-by-case basis to return the estimated $1.3 billion in nonproduct costs passed through to consumers under the regulations.

Most of the companies - including six companies that have a similar suit against FEA in Delaware - had been "banking" the nonproduct costs under the regulations. These "banked costs" allowed the companies to increase their profits under the oil-pricing regulations so that when the market slackened or when they were hit with price rollbacks under pricing enforcement action, they could pay them out of banked costs, rather than out of other revenues.

Knowledgeable oil industry sources said the litigation thus far has demonstrated that FEA regulations at the time were to a large extent unenforceable because of their complexity and ambiguity.

Lang said, "This one isn't over yet, but it's a good example of the giants in the oil industry fighting the agency over technicalities of regulations on which millions of dollars depend."